by J Scott Christianson, Columbia Daily Tribune Columnist
Last year’s Nobel Peace Prize was awarded to Muhammad Yunus, a U.S.-trained economist who established a bank in his native India to lend small amounts of money to the poorest people in the world. These micro-loans allowed people to raise themselves out of poverty, establish a good credit rating and develop thousands of small, sustainable businesses.
In areas where micro-loan programs have been established, the local economy has benefited from the increased economic activity and decreased poverty. Today Yunus’ micro-loan program is being replicated around the world.
Contrast Yunus’ loan program with the loan operations run by “payday loan” companies. Both loan to the working poor, but the 1,500 or so loan operations run in Missouri by businesses such as Quick Cash and Advance America are not trying to help people out of poverty but instead keep them in a continual state of financial distress.
Often charging as much as 400 to 500 percent interest, these companies prey on the poorest people in our community – people who have no good options for short-term financing. Many are able to pay off these outrageous loans, but many can never get out of the cycle of debt once they enter, and the payday loan companies make more and more money as their customers get further and further in debt. It is like trying to dig out of quicksand; you are just never going to get ahead of the game.
Moreover, these predatory companies do little to boost the local economy. Instead of spending money at local businesses on items they need or want, many of Columbia’s working poor end up spending what little money they have to pay the exorbitant fees and interest charged on these loans.
Credit card companies are becoming just as predatory. Today they operate more like payday loan operations than banks, using all sorts of tricks to extract more fees.
One trick is to send out monthly statements to customers just days before the payment-due date to generate more late fees. Another is that instead of refusing charges to your card when you reach your credit limit, credit card companies just advance you the extra credit and tack on an overdraft fee. So a $1 overcharge can bring $40 to $60 in extra fees and give the credit card company the justification it needs to up the interest rate on your entire balance.
By providing more ways for consumers to fall into the “fee” trap, credit card companies have been able to make fee-charging a highly profitable line of business. In 2006, credit card companies made more than $17 billion in fees alone. The shallow excuse is that these fees are used to cover the cost of the manpower involved in managing these accounts. Really? Have you ever tried to talk to someone at a credit card company? As far as I can tell, these companies are mostly run by automated voice-response systems.
People should be responsible for their debts, and paying interest on borrowed money is something we all expect to do, regardless of our economic status. But these predatory practices by payday loan operations and credit card companies are hurting people, business and our economy.
Several proposals at the state and national level would regulate interest rates and fees. I really don’t like to see government setting market prices because it is usually an inefficient means for achieving the desired ends. Without an alternative, however, this might be what has to happen.
Surely the Missouri Bankers Association could work with its members and state government to find an alternative solution that would allow for small loans to individuals at reasonable rates through more traditional banking institutions.
The Columbia area has many fine leaders in the banking industry. While they might not win a Nobel Prize, they could do us all a great service by finding a way to drive these predators out of the lending market. And who knows, today’s micro-loan customer might be tomorrow’s home-loan customer.